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December 2006

About This Issue

What are the fundamental determinants of economic growth and development? The question is of much more than academic interest in a world where billions of people continue to live at the margins of subsistence. Yet experts’ advice to poor countries has been all over the map. During the heyday of the “Washington Consensus,” the primary emphasis was on implementing a particular menu of policy changes. More recently, economists have been placing greater stress on the role of institutions — in particular, the rule of law, protection of property rights, and other limits on government power. Less widely discussed is a more controversial proposition: culture — basic norms and values — holds the key to a country’s development prospects. The linkage between culture and economic progress was most famously explored by Max Weber, but in contemporary debates there has been a decided reluctance to “blame the victim” or to declare that some cultures are “better” than others. In this issue we examine how much culture matters — and how culture, institutions, and policies interact and mutually influence each other to shape countries’ economic destinies.

Lawrence E. Harrison, author of The Central Liberal Truth, and co-editor, with Samuel Huntington, of Culture Matters: How Values Shape Human Progress, will lead off the discussion with an overview of studies on the effects of culture on growth around the world. Replies will follow from UC Davis economist Gregory Clark, author of the forthcoming A Farewell to Alms: A Brief Economic History of the World; George Mason economist Peter J. Boettke, author of Calculation and Coordination: Essays on Socialism and Transitional Political Economy; and Harvard economist James A. Robinson, co-author of, with Daron Acemoglu, Economic Origins of Dictatorship and Democracy.

Lead Essay

Culture and Economic Development

Since I was first involved in international development assistance, almost a half century ago, dominant development paradigms have come and gone, among them Rostow’s stages of economic growth, national planning, focus on the poorest of the poor, appropriate technology, dependency, focus on the private sector, the Washington Consensus, and institutional development. During those fifty years we have witnessed a few success stories, largely in East and South Asia. But what most captures those years is a sense of disappointment, of frustration—of “development fatigue”—driven by the failure of the large majority of countries in Africa, Latin America, and the Islamic world to achieve transforming rates of economic growth.

At no point in this paradigm odyssey have cultural values and attitudes been confronted. It is true that, since the 1970s, cultural anthropologists have participated in the design of projects. But that participation has usually been limited to assuring that cultural realities were adequately reflected in design, rarely to encourage cultural change. Many anthropologists, indeed many social scientists, subscribe to cultural relativism, the theory that each society or culture must define its own values and that cultures are neither better nor worse, only different. One can imagine the horrified reaction to a comment made by David Landes, author of The Wealth and Poverty of Nations, at a World Bank conference in 2000: “…there are cultures that I would call ‘toxic’…[that] handicap the people who cling to them.”[1]

Cultural relativism fits very nicely with, and reinforces, the predilection of many economists to assume that people are the same the world over. As the former World Bank economist William Easterly, author of The White Man’s Burden, wrote in reviewing my book Who Prospers?, “Maybe there is a lot to be said for the old-fashioned economist’s view that people are the same everywhere and will respond to the right economic opportunities and incentives.”[2] How then would Easterly explain why, in multicultural countries where the economic opportunities and incentives are available to all, some ethnic or religious minorities do much better than majority populations, as in the case of the Chinese minorities in Indonesia, the Philippines, and Thailand—and any other place to which the Chinese have migrated, including the United States? Why has the Washington Consensus worked well in India and poorly in Latin America (with the exception of Chile), where socialism, and even authoritarian socialism in the cases of Cuba and Venezuela, appear to be alive and well? Cultural factors may not supply the whole explanation, but surely they are relevant.

Alan Greenspan got it right when he said, in the wake of the collapse of the Russian economy in the late 1990s. “I used to think that capitalism was human nature. But it isn’t at all. It’s culture.”

Some Culture-Sensitive Economists

Some economists have confronted culture and found it helpful in understanding economic development. Perhaps the broadest statement comes from the pen of David Landes: “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all the difference.”[3] Elaborating on Landes’s theme, Japanese economist Yoshihara Kunio writes, “One reason Japan developed is that it had a culture suitable for it. The Japanese attached importance to (1) material pursuits; (2) hard work; (3) saving for the future; (4) investment in education; and (5) community values.”[4]

Even the culture-skeptic Jeffrey Sachs recognizes the influence of culture. His chapter in Culture Matters says, in essence, that culture doesn’t matter. And while that theme echoes in his recent book The End of Poverty, at one point he also has this to say: “Even when governments are trying to advance their countries, the cultural environment may be an obstacle to development. Cultural or religious norms may block the role of women, for example, leaving half the population without economic or political rights…”[5]

Italian economist Guido Tabellini recently undertook a study of comparative economic performance in European regions employing data from the World Values Survey concerning trust, control of one’s destiny, and respect for others (all three of which turn out to be positively correlated with economic development), and obedience, which correlates negatively. His conclusions:

These cultural traits are strongly correlated not only with the economic development of European regions, but also with the economic development and institutional outcomes in a broad sample of countries…An implication of this analysis, therefore, is that there is no primacy of formal institutions over culture. On the contrary, both are likely to interact and to shape the actual functioning of real world institutions, and to influence the incentives and the behavior of economic and political agents. [6]

Moynihan and the Culture Matters Research Project

From 2002 to 2005, I led the Culture Matters Research Project (CMRP) at the Fletcher School at Tufts, a follow-up to the book Culture Matters (Basic Books, 2000), co-edited by Samuel Huntington and me. Some 65 experts from 25 countries participated, and major conferences were held at Fletcher in 2003 and 2004. Three CMRP books were published in 2006: the overview book The Central Liberal Truth (Oxford 2006), written by me; Developing Cultures: Essays on Cultural Change (Routledge 2006) co-edited by Jerome Kagan and me; and Developing Cultures: Case Studies Routledge 2006) co-edited by Peter Berger and me.

The goal of the CMRP was the guidelines for progressive cultural change that appear as the last chapter of The Central Liberal Truth. To reach the goal, we focused on three questions:

What is it in culture that influences the behaviors that in turn influence political, social, and economic performance?

What are the institutions and instruments of cultural transmission and change?

What can we learn about culture and cultural change from case studies of success and failure?

The CMRP findings bear out the wisdom of Daniel Patrick Moynihan’s oft-cited aphorism, “The central conservative truth is that it is culture, not politics, that determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself.” The latter is, of course, the source of the title of my latest book. Culture Matters might well have been titled The Central Conservative Truth.

Disaggregating “Culture”

The answer to Question 1 is a typology of 25 factors that are viewed very differently in progress-prone cultures and progress-resistant cultures. Its principal architect is the Argentine scholar and journalist Mariano Grondona, who had the United States in mind as his progress-prone model, and Argentina, and by extension Latin America, as his progress-resistant model. The 25 factors are broken down into four groups: Worldview, Values and Virtues, Economic Behavior, and Social Behavior. These compartments are not water-tight—factors that influence economic performance are found in all. For example, the Worldview factor of “Destiny” contrasts “I can influence my destiny” (progress-prone) and “fatalism” (progress-resistant)—with weighty implications for entrepreneurship, one of the key factors in the Economic Behavior cluster. Others in that cluster include:

Work/Achievement, which contrasts the progress-prone “Live to work” with the resistant “Work to live.”

Frugality: “the mother of investment” vs. “a threat to equality.”

Risk propensity: moderate in the progress-prone culture; low, with occasional adventures, in the progress-resistant culture.

Competition: leads to excellence vs a threat to equality—and privilege.

Innovation: the progress-prone culture is open to and quick to adapt innovation, while the resistant culture is suspicious of and slow to adapt it.

Advancement: merit vs. family/patron connections.

Cultural Transmission

The Question 2 institutions and instruments of cultural transmission include child rearing practices, several aspects of education, religion, the media, political leadership, and development projects. Of these, religion may be most relevant to economic development. We grouped 117 countries by predominant religion and recorded their performance on ten indicators or indices of progress, two of which directly reflect prosperity (the UN Human Development Index, which includes per capita GDP as well as three social factors; and World Bank per capita GDP calculated on the basis of purchasing power parity). Several other of the ten indices are also relevant, e.g., trust, corruption, income distribution.

The data roundly validate Max Weber’s thesis in The Protestant Ethic and the Spirit of Capitalism: Protestant countries do better than Catholic countries in creating prosperity. To be sure, the averages for the Catholic countries are depressed by Latin America’s slow development, but even when one looks only at First World democratic-capitalist societies, Protestant countries do substantially better than Catholic countries with respect to prosperity, trust, and corruption.

More broadly, the analysis of religions suggests that Protestant, Jewish, and Confucian societies do better than Catholic, Islamic, and Orthodox Christian societies because they substantially share the progress-prone Economic Behavior values of the typology whereas the lagging religions tend toward the progress-resistant values. Symbolic of this divide is the persistent ambivalence of the Catholic Church toward market economics, an issue underscored by Michael Novak in his book The Catholic Ethic and the Spirit of Capitalism. But religion is not the only source of progress-prone economic behavior: the Basques are highly entrepreneurial and highly Catholic; and Chile, boasting the most successful sustained economic performance in Latin America, is also the most Catholic—and the Latin American country with proportionally the largest Basque-descended population.

In any event, the foregoing suggests the existence of a Universal Culture of Progress: the same Economic Behavior values, whatever their root, create prosperity in widely different geographic/climate, political, institutional, and indeed cultural settings. As far as we know, culture has nothing to do with genes. While cultural change is neither a simple nor easy proposition, it is constantly occurring around the world, and there is no compelling reason why the “universal progress values” should be beyond the reach of any human society.

Case Study Lessons and Moynihan

Of the 27 case studies, ten are economic success stories: the four Confucian countries of China, Japan, Singapore, and South Korea; India; Chile; and four Western societies: Ireland, the Province of Quebec, Spain, and Sweden. While all ten combine elements of Moynihan’s Central Conservative Truth (culture dominant) and Central Liberal Truth (politics/policies dominant), progress in the four Confucian countries, Chile, and Sweden is, in my view, chiefly attributable to pre-existing culture, while progress in Ireland, Spain, and the Province of Quebec, is chiefly attributable to politics and policies that promoted cultural change. India is an intermediate case that requires more study.

East Asia

The “Confucian” countries (more accurately the countries strongly influenced by Chinese culture, which also embraces, in addition to Confucianism, Taoism, Buddhism, and ancestor worship) all share substantially in the universal culture of progress: education, achievement, work ethic, merit, and frugality are all highly valued in the East Asian societies. Their economic success contradicts Weber’s analysis in The Religion of China in which he asserts that rapid capitalist development is unlikely in China in large measure because of the absence of anything like the Calvinist “tension” caused by uncertainty about being of the “elect.”

Many observers attributed the stagnation of the East Asian economies (Japan excepted) at mid-twentieth century to Confucianism, particularly to the influential role played by the Mandarin literati (Mao a prototype) and the low prestige that attached to economic activity in the Confucian scheme of things. But all that was necessary to release the powerful education/achievement/merit/frugality undercurrent to perform its economic magic was encouragement from the political leadership, in the cases of South Korea and Taiwan stimulated by security concerns. The trigger for the magic in China was Deng Xiaoping’s 1978 pronouncement, “To get rich is glorious,” effectively marking the end of Mao’s Marxist revolution.

Once the encouragement and incentives were in place, the Universal Progress Values drove the economic miracles, much as they had when the Meiji leaders in Japan decided in 1868 to catch up with the West.

Chile

That Chile is different from other Latin America countries is apparent from its highly effective implementation of the Washington Consensus policiest—the only country in Latin America to do so. Its unique status in Latin America is also apparent from its 2005 Transparency International Corruption Perceptions Index rating: tied with Japan at number 21, with the next Latin American countries being Uruguay at number 32 and Costa Rica and El Salvador at number 51. And contrary to the often criminal comportment of police in other Latin American countries, Chile’s national police force, the Carabineros, has a solid reputation for professionalism and honesty.

Chile also enjoys an atypical entrepreneurial tradition. In the latter decades of the nineteenth century, Chileans were noted in the Southern Cone for their entrepreneurial skills, and they provided a considerable impetus to the growth of the Argentine economy as well as their own. While other factors, including Chile’s geography and climate, so similar to California’s, doubtlessly also contributed to Chile’s entrepreneurial endowment, the disproportionate Basque influence had to have been an important source.

Foreign investment has played a key role in Chile’s economic development, above all in copper mining. But the entrepreneurial response to the open economic policies installed during the Pinochet dictatorship and sustained since 1990 by elected left-of-center governments has come principally from Chileans.

Sweden

By the measure of the ten indices or indicators of political, economic, and social development, ranging from the UN Human Development Index to World Values Survey data on trust, the Nordic countries are the champions of progress.[7]

All five Nordic countries—Finland, Sweden, Norway, Denmark, and Iceland—have a Lutheran background, even though few today are churchgoers. Lutheranism is the source of much of the Nordic value system that has produced high educational levels, extensive welfare programs, and high quality entrepreneurship symbolized by Finland’s Nokia and Sweden’s Volvo, Saab, and Ikea. The compatibility of economic efficiency and social spending in the Nordic context is apparent form the 2006 World Economic Forum ratings. The Economist recently observed, “High taxes and generous welfare safety nets need not undermine competitiveness…Scandinavian economies are ranked high in the league…”[8] (Sweden was number two in the world.)

The economic success of the Nordic societies, and Protestant societies in general, strongly suggests that Weber’s focus on Calvinist “tension” was too narrow and that it is the Protestant virtues of education, achievement, work ethic, merit, frugality, honesty—Universal Progress Culture—that is the real force behind the spirit of capitalism.

Ireland and Spain

The Irish and Spanish economic “miracles” have much in common. They were both largely triggered by the opening up of theretofore inward-looking economic policies. Foreign investment and, particularly in the case of Spain, tourism played major roles, compensating at the outset for domestic shortfalls in both capital and entrepreneurship. Both benefited handsomely from the assistance programs of the EU. Both emphasized education, in Ireland’s case converting itself in the span of 40 years from one of the least educated European countries to one of the most educated. And in both, the influence of the Catholic Church declined sharply, to the point where one hears the term “post-Catholic” applied to both. In the process, both cultures were transformed.

Quebec

Prior to the “Quiet Revolution” (1960-75), Quebec was underdeveloped by contrast with the other Canadian provinces: poorer, less industrialized, less educated, less healthy, less democratic. Today, the indicators of progress in Quebec are comparable to the rest of Canada and in some respects, e.g., high school dropout rate, are the best in Canada. What happened to bring about this transformation?

The use of an inclusive nationalism to promote unity, effort, and sacrifice.

A process of “declericalization” in which the church’s influence was drastically reduced, above all in education, over a five-year period (1961-66). Like Ireland and Spain, Quebec is sometimes referred to today as “post-Catholic.”

Massive resource allocation to education.

Promotion of gender equality, particularly in the workplace.

The creation of a modern, creative state that has spearheaded development ranging from Cirque de Soleil to advanced biotech industries. A “corporatist” approach bringing business, labor, the professions, etc. together with government for policy discussions has been generally successful.

State-led efforts to reduce inequality.

Ironically, Quebec’s value profile has converged with that of Anglophone Canada simultaneously with the growth of pro-sovereignty sentiment in the province.

India

It will come as a surprise to many—it did to me—that, at least according to Angus Maddison’s data, India under the Mughals accounted for more than twenty percent of the world’s GDP in the early 18th century, principally because of textile and agricultural production.[9] That fact, coupled with the economic success of many Diaspora Indians, including those who have migrated to the United States, suggests the presence of Universal Progress Values in Indian culture. Moreover, the parallels between the unfolding Indian economic miracle and the East Asian miracles are striking: the opening up of the Indian economy in the early 1990s produced a response similar to that produced by “To get rich is glorious” in China.

To be sure, India’s economic surge has been fueled in part by its large pool of English language speakers, a valuable asset also enjoyed by Ireland, and by foreign investment focused on this linguistic asset. But Indian entrepreneurs have also played a prominent role in the surge.

We need to develop a better understanding of the cultural context of the Indian miracle. India is a country of numerous ethnic and religious groups—it is, for example, the second most populous Muslim country (after Indonesia). Which groups are major participants in and beneficiaries of the economic surge? What is the effect on the majority elements of the society that do not participate directly in the modernizing sectors? What is the effect on women, whose subordinate role in India is underscored by the fact that more than fifty percent of Indian women are illiterate? These are among the many questions raised by the incipient Indian “miracle.”

Conclusion

Culture does matter in economic development, and governments, development assistance institutions, think tanks, and universities must confront culture and cultural change. Incorporation of cultural analysis and cultural change into the mix of policy and project design factors may significantly accelerate the pace of economic development.

Notes

[1] The World Bank, Culture Counts: Financing, Resources, and the Economics of Culture In Sustainable Development (Washington DC, 2000), p. 30.

[2] The World Bank and the IMF, Finance and Development, March 1994, 51.

Response Essays

The Universal Culture of Progress

My reaction to Lawrence Harrison’s essay is one of intellectual schizophrenia. I simultaneously want to endorse his promotion of culture, and to run screaming from his lethal embrace.

As an economic historian who studies economic growth in the long run, I agree completely that the banishment of culture from much of the consideration of wealth and poverty by modern economists has left us with untenable theories of growth.

The standard economist emphasizes that stability, incentives, and laissez-faire are all the magic needed for riches. Harrison’s quote from Bill Easterly, “people are the same everywhere and will respond to the right economic opportunities and incentives,” captures the essence of the economic approach.

But economists have to ignore that the institutional magic was applied for at least 100 years to India by the British before 1947: years when growth was minimal, industrialization negligible, and India fell steadily further behind the west. They have to blind themselves to the fact that pre-industrial England, from 1200 on, experienced minimal gains in economic efficiency, yet was characterized by centuries of monetary and political stability, peace and security, low taxes (often below 1 percent of income), a tiny public debt, and free commodity and labor markets. Were it applying for development aid, the World Bank would have warmly praised prudent medieval economic management.

Nor can we even say that stability and good institutions are even a necessary condition for growth. The northern Italian city states of the Renaissance, the European economic center of the time, were racked by frequent internal violence. Houses were fortified, not against the enemies outside the city walls, but against the murderous designs of fellow citizens.

The failure of the standard, tired institutional explanations opens the doors, it seems, for culture. Further, as someone who lives and teaches in heavily immigrant California, there are daily reminders of important cultural differences between the successful immigrant groups such as the Chinese and Koreans, and the struggling groups such as the Mexicans, Central Americans, and Hmong.

Yet attempts to introduce culture into economic discussions so far have been generally either ad hoc, vacuous, blatantly false, or void of testability. If culture is a key to growth, the fear is that economists will be reduced to rooting about in the intellectual undergrowth with people we hold in low esteem: qualitative sociologists and cultural anthropologists. Since we have no idea of how cultures develop, or how to change cultures, to admit the primacy of culture may be to admit the defeat of the entire economics project.

Most attempts to measure culture by objective, measurable criteria such as religious affiliation, for example, seem to miss most of the interesting variation. Weber, as is well known, thought that certain types of Protestant ideology were conducive to economic growth. Lawrence Harrison’s work validates these findings.

The Catholics of modern southern Germany, however, would think they have a thing or two to teach their Protestant compatriots of the north about the virtues of hard work and self-reliance. The dour and thrifty Calvinists of my native Scotland look with envy now at the successes of the Catholic Irish, and ask how they can emulate this. Deepak Lal discussed how the “Hindu Equilibrium” kept India mired in poverty. But the Hindus of Bombay have recently achieved income levels 4-6 times those of their co-religionists in Uttar Pradesh and Bihar. And Hindu immigrants from India have prospered in both the USA and Great Britain, while their co-religionists in Bihar remain among the poorest people in the world. Confucian values are now growth-promoting. Yet Confucian China stagnated from 1800 to 1949.

The reality is that the explicit tenets of any cultural system, such as the theological content of religions or social codes, is really a very loose garment draped around the body of a society that leaves enormous room for interpretation, innovation, and variation. There are dizzyingly many varieties of Catholics, matched by an equivalent gallimaufry of Protestants. The same Holy Koran that validates the ban on women driving in Saudi Arabia, and the religious police patrolling the shopping malls in search of unmarried couples, also underpinned the relaxed and liberal Ottoman Empire. Protestants on average may have values associated with economic growth, but that seems to have nothing to do with their specific theology.

Lawrence Harrison may seem to escape some of this problem of identifying cultural variation by using a survey of 25 factors that purports to identify systematically the essential elements of cultures that promote high incomes and growth: universal progress cultures. He divides cultures into the “progress-prone” and the “progress-resistant.” In progress-prone societies, for example, people assert “I can influence my destiny.” In progress-resistant societies “fatalism” rules. Progress-prone societies have better economic performance.

Harrison’s project seems in this report to be an echo of David McClelland’s work in the 1950s and early 60s. McClelland argued that societies differed culturally in their “need for achievement,” which could be diagnosed by personality surveys or even by analysis of the popular literature of the society. High need for achievement was characteristic of Protestant societies. This is not to imply that Harrison is wrong, just to suggest that in fifty years the agenda of introducing culture into analysis of growth has not advanced one step from the state of the art of the 1950s.

The problem with both the Harrison and McClelland approaches is that the responses may reflect just the realities of the institutional framework people live within, rather than their cultural attitudes. A North Korean who reports “fatalism” or “resignation” is plausibly no different culturally from a South Korean who states “I can influence my destiny.” These cultural measures are not a pure probe into the essence of local cultures, but reflect institutions and economic environments that change the real possibilities for people. It is hardly unexpected that people in growing or wealthy societies are more open to innovation, more accepting of risk, and more welcoming of advancement by merit. But which came first, the economic dynamism and wealth, or the social attitudes?

So, if we want to measure the effects of culture on economic growth, we need measures of culture that are independent of growth. Earlier attempts to link culture to religious doctrine were in part an attempt to find such a grounding. Recent attempts of those in experimental economics, such as Ernst Fehr, Sam Bowles, and Joe Henrich, to see how subjects from different cultures interact in controlled strategic games show another path to isolating pure cultural differences. Game theory predicts how rational self-interested actors should behave in experiments. By looking at deviations we can identify the existence of cultural norms, and whether they vary across societies. However, the results of these investigations, while suggesting significant cultural differences, so far have not been consistent or informative.

We also find in history clear signs that significant aspects of peoples’ preferences—their degree of impatience, their work inputs, and their propensity to violence—changed over time in ways unrelated to economic circumstances, at least in England, as the society moved from stagnation towards modern growth. Further, there is a dynamic in the pre-industrial world—survival of the richest—that might explain these trends.

But, in general, since Harrison has measures of culture that are not clearly independent of economic circumstances, and since he has no clear intervention to alter culture, the path he plots may lead us as much into the undergrowth as into the light.

The How, The What, and The Why of the “Culture Matters” Thesis

Lawrence Harrison’s essay (and his long–time work in general) seeks to answer a central mystery in human history by reference to differences inherent in people. Social scientists have been dancing around the “culture matters” thesis for well over a century. The pressing puzzle at the end of the 19th century in the social sciences was Max Weber’s “Why No Capitalism in China?” and we begin the 21st century asking Bernard Lewis’s question, “What went wrong with Islam?” or Jeffrey Sachs’ question, “How can we end world poverty?” with special reference to the tragedy of Africa. Even the most technical of economists are drawn to these questions concerning differences in well-being among the populations of the world. Robert Lucas in his 1988 essay “Making a Miracle” states:

Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.

The attempt to find the answer in different characteristics of the people or the land has involved a lot of loose thinking. Economics has been one of the most powerful counter-balances to this style of reasoning. At one time, the argument that a country’s economic well-being was solely a function of geography and abundance of natural resources was seriously entertained. This explanation of differences failed, however, when confronted with the economic performance of Hong Kong, which is not particularly blessed in terms of location or natural resources, yet has experienced high economic performance. Alternatively, we could argue that differences in performance are due to the people that populated the country (e.g., levels of human capital investment). But the emphasis on human capital alone failed to explain why some countries which invested heavily in science education nevertheless had poor economic performance, such as the former Soviet Union.

Alvin Rabushka in The New China makes the economic argument as clearly as anyone. He takes the culture thesis head-on and argues that the evidence doesn’t support it. Differences in economic performance between Mainland China, Taiwan, and Hong Kong cannot be explained by cultural differences, but instead can only be explained by different economic institutions and public policies. Countries that do not respect private property rights, limit the scope of regulation, practice monetary restraint and fiscal responsibility, and practice free trade will have hard time experiencing long-term economic growth and development. Economic freedom—not the cultural traditions of a people, or the geographic advantages of a country—leads to economic growth and development. Culture and geography may have an impact on human affairs, but the main causal factor in determining differences in economic performance among nations is the rules of the game that govern the way that people interact with one another (within and beyond national borders) and with nature’s resources.

To put this argument in a slightly different way, think of a basic lesson from economics. The only way to increase real income is to increase real productivity. Increases in real productivity are a function of improvements in labor skill (human capital), technology (physical capital and know-how) and organization (managerial skill and team-production). But the willingness to make those investments is a function of the incentives actors face in any given economy, and the feedback from the local environment, which provides (or obscures) information about how best to use time and energy given the incentives. It is our ability to bet on ideas and find the financing that brings those bets to life that determines the pattern of exchange and production, and the rate of innovation in any given society. And our willingness to bet is a consequence of the institutions that are effectively operating in any society. The rules of the game and their enforcement provide the structure of incentives and the informational feedback in the system. If the rules of the game reward predation (by either public or private actors), then the time horizon of investment will be shortened, improvements in labor, technology, and organization will be stifled, and growth and development will not follow at the pace hoped for.

As Adam Smith wrote long ago:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

We have to unpack this sentence, but the bottom line is that differences between the economic performance of countries is a function of institutions (i.e., the rules of the game and their enforcement). Low-income countries might realize the gains from small-scale and self-enforcing trades, but do not have the institutional framework in place to realize the gains from extensive specialization and trade. Property rights are insecure, contracts are not enforceable, and thus social cooperation is limited rather than extensive. As Mancur Olson put it: “The intricate social cooperation that emerges when there is a sophisticated array of markets requires far better institutions and economic policies than most countries have.”

But this brings us full circle back to the “culture matters” hypothesis. Yes, we do need to have market prices to allocate resources efficiently. The “getting the prices right” mantra is not wrong, just incomplete. In order to get market prices, we do need to have private property rights and the enforcement of contracts. The “getting the institutions in place” mantra isn’t wrong either. Many of the significant advances in political economy during the 1990s, when the problems of socialist transition were at the forefront of professional and public policy attention, were related to a change of emphasis from “getting the prices right” to “getting the institutions in place.” But as the problems of post-communism and the frustration with development assistance programs have lingered, the question of how precisely you get the right set of institutions in place has become paramount.

The Rabushka challenge to the “culture matters” hypothesis is where we must start, but in an ironic twist, the question is begged by “natural experiments.” Cultures are not homogeneous across nations, and thus differing cultural attitudes and beliefs are either more or less prone to accept certain institutional environments. In economic terms, culture is a tool for the self-regulation of behavior, and as such it either lowers or raises the costs of enforcing the rules of the game. A free society works best when the need for policemen is least. If the rules of conduct correlated with high levels of economic well-being are viewed by a culture as illegitimate, then those rules will be violated unless there are strong monitors. The costs of monitoring may be so high that the social order cannot in fact be sustained. In his forthcoming After War: The Political Economy of Exporting Democracy, Chris Coyne has documented in gruesome detail just how perilous progress is when efforts are made to establish liberalism at the point of gun.

In short, culture either legitimates or delegitimates institutional structures, and different institutional structures affect the incentives actors face and the informational feedback available to guide their plans and choices. So the “culture matters” hypothesis is not merely an empirical correlation. This invites a theoretical investigation of the causal mechanisms at work when some countries successfully adopt institutions correlated with high economic performance while others seem unable to “get” those institutions and thus must forgo the associated gains from specialization and exchange.

Work by scholars such as Lawrence Harrison provides very helpful empirical information on cultural beliefs and attitudes, but the causal mechanism through which this impacts economic performance is often left unexamined. This is an area where intellectual arbitrage between the economist and the historically informed and cultural sensitive social scientist must be pursued if we hope to make progress in understanding the process of economic development. Scholars such as Joel Moykr in The Levers of Riches have documented the great technological innovations that fueled growth during the Industrial Revolution, but Mokyr also documents the underlying belief systems and attitudes that had to be present for those innovations to be discovered, implemented, and put into common practice. Without that underlying cultural commitment to scientific discovery, innovation would have been stifled. We can say the same for beliefs and attitudes that undermine private property, mutually beneficial exchange, and commercial development.

The causal mechanism, I want to suggest, is the cost of monitoring and enforcing rules, and policies that respect persons and property. As Steve Pejovich has argued, “It is the Culture Stupid.” But the important point to stress in all of this, from my perspective, is precisely how it is that culture matters. The bottom line is that while there are an infinite number ways in which people can live together, there are very few ways they can live together (as both friends and strangers) in peace and prosperity. And it doesn’t matter whether a society is Muslim, Christian, Jewish, or purely secular; unless it has institutions and policies that provide for secure private property, freedom on contract, limited scope of regulation, monetary restraint, fiscal responsibility, and open trade, the society will not experience economic growth and development.

Whatever advantages a culture may have, they will not be realized under bad institutions. And whatever disadvantages a culture may have, they will slowly erode, and the culture will improve, when people get to live under institutions of political and economic freedom. Culture can act as a constraint, but it is also a malleable constraint. The important causal variable is the set of rules that governs the way we interact with one another and with the resources at our disposal. Those rules must enable our ability to realize the gains from specialization and exchange, and reap the benefits of innovation.

The economic well-being of a nation and its people is ultimately a function of a horse race between three S factors: Smithian gains from trade, Schumpeterian gains from innovation, and Statist stealing and stupidity. In this horse race, culture raises or lowers the costs associated with the different S’s. As long as the “invisible hand” of Smithian and Schumpeterian forces dominates the “grabbing hand” of the state, economic growth and development will follow. Sadly, the stealing and stupidity of Statism still outcompetes Smithian and Schumpeterian forces in far too many places, to the detriment of the far too many poor souls who populate our world .

It’s Not Culture

Does the culture of a society determine its development prospects? One of the hardest things about evaluating this claim is to actually define what culture is. Lawrence Harrison seems to associate it, reasonably, with the values and attitudes that people have in society. This gives culture a normative slant, and this is consistent with his subsequent emphasis on religion. This definition of culture, which I think is a useful one, distinguishes it from more positive beliefs about how people will behave. There is a big difference, for example, between “Will I be punished if I cheat someone?” and “It is wrong to cheat someone.” Defined in this way, Lawrence Harrison argues that the culture of a society is one of the crucial things, maybe the crucial thing, which determines its prosperity. I agree that this might be true, but I know of no really convincing social science evidence that this is the case and I do not believe that the arguments and evidence that Lawrence Harrison provides convince.

He begins by arguing that the primary role of culture is obvious from the fact that “in multicultural countries … some ethnic or religious minorities do much better than majority populations, as in the case of Chinese minorities in Indonesia.” But this fact is consistent with many different theories. For one thing, the fact that minorities do well may be because dominant groups allow them to do well. In Ghana in the 1960s, President Nkrumah favored Lebanese businessmen because their wealth was not threatening politically to him. In contrast, the emergence of a Ghanaian business class was. This emerges in the analysis of Killick of the attempt by the government of Nkrumah to promote industrialization. Killick notes:

Even had there been the possibility [of creating an indigenous entrepreneurial class] it is doubtful that Nkrumah would have wanted to create such a class, for reasons of ideology and political power. He was very explicit about this saying `we would be hampering our advance to socialism if we were to encourage the growth of Ghanaian private capitalism in our midst.’ There is evidence that he also feared the threat that a wealthy class of Ghanaian businessmen might pose to his own political power. [1]

In this context, it is interesting that Nkrumah’s solution to consolidate his power was to limit the size of businesses that Ghanaians could own. This caused problems for his industrialization policy, which he got around by allowing foreign businessmen to enter Ghana. Though this was inconsistent with his aggressively nationalistic and anti-imperialistic rhetoric, these businessmen did not pose a domestic political threat. Killick notes “Given Nkrumah’s desire to keep Ghanaian private businesses small, his argument that ‘Capital investment must be sought from abroad since there is no bourgeois class amongst us to carry on the necessary investment’ was disingenuous.” [2] He goes on to add that Nkrumah “had no love of foreign capitalists but he preferred to encourage them rather than local entrepreneurs, whom he wished to restrict”. [3]

The Lebanese were not differentially successful because they had a “progress prone culture,” but because they received favors from politicians. The same was true of Indian businessmen in Kenya during the Presidency of Daniel Arap Moi and indeed of Chinese businessmen in Indonesia during the regime of President Suharto. [4]

There are doubtless other reasons why minorities do well. For one, the Chinese who move to other countries are a highly selected, and possibly differentially entrepreneurial, sample. I agree that the success of such minorities is interesting, but I do not agree it shows the importance of culture. Another hypothesis could just be that since such groups tend to interact more frequently with each other than members of the general population do, they are able to cooperate and support each other better, for example, by lending each other money to start businesses or send their children to school.

There is an additional problem here. If the Chinese do well in Indonesia because they have such a good culture, then why is China one of the world’s poorest countries? An answer for this question emerges later in the paper where China is argued to be “an economic success story.” But surely the culture which supposedly is conducive to prosperity in China is an old one and long predates the acceleration of growth which took place in the late 1970s. Lawrence Harrison attributes this to Deng Xiaoping’s pronouncement that “To get rich is glorious,” but also notes that the “incentives were in place.” So culture was held constant and institutions and policies changed while growth accelerated. From this it seems to follow that the reasons countries are poor has nothing to do with culture but rather policies and institutions that do not create the right incentive environment. It could be, of course, that if one got the incentives right in Africa, then there would be no growth because the culture would not be consistent with it, but I doubt this. The example of Botswana is against it, and every African I know thinks that to get rich is glorious or, if not glorious, then at least desirable (probably more so than to a British person like myself!)

So to me this does not add up to convincing evidence for the role of culture. If a country clearly characterized by an adverse culture, such as Ireland or Spain, does well, then it must be because they are “post-Catholic.” If India was once rich, then this “suggests the presence of Universal Progress Values in Indian culture.” By this argument Argentina in 1920 must have had a good culture for economic development since it was amongst richest countries in the world. Where did that go?

What about Chile, the one Latin American success story? Lawrence Harrison argues that Chile has a unique culture, but then why did it manifest itself so recently? It is only since the mid-1980s that the growth path of Chile has distinguished it from other Latin American countries. Though Lawrence Harrison sees Chilean culture was different historically, I doubt this. Until 1958 rural elections were highly fraudulent and agricultural workers coerced into voting for the candidates their employers favored. [5] Indeed, the praised Carabinieros were deeply implicated in this fraud and in stopping attempts to develop more democratic institutions. According to a former minister of interior in the 1940s, Arturo Olavarria: “a group of carabinieros would arrive at a fundo accompanied by a convoy of trucks. When the inquilinos were assembled in the area, the carabinero officer would order those who wished to continue the strike to stand on his left. The officer would then order that the strikers gather their families, cats, dogs, chickens and belongings and get in the trucks to be evicted. … This tactic I converted into a system … as the good ones went on the right and the bad ones on the left, as I hoped will occur one day in the valley of Josafat.” [6]

So culture might matter, but doubters like me will not be convinced by the evidence here. Also though I work too much and neglect my family more than I should I cannot help feeling there is something wrong with aspiring to live in a society where we “Live to work.” It sounds too much like the sort of slogan George Orwell might have come up with.

[4] See, for example, Michael T. Rock, “The Politics of Development Policy and Development Policy Reform in New Order Indonesia,” University of Michigan, William Davidson Institute Working Paper #632, 2002.

[5] See Jean-Marie Baland and James A. Robinson, “Land and Power : Theory and Evidence from Chile,” NBER Working Paper #12517, 2006.

The Conversation

Response to Clark, Boettke, and Robinson

I would never have written my essay had I known that it could be lethal for you. For I value our economic historians, prominently among them David Landes, who had this to say about The Centtral Liberal Truth: “Nothing is so important and tenacious as culture…in shaping economic performance…I can think of no better entrance to the topic…A gateway study.”

At least according to Ronald Inglehart, coordinator of the World Values Survey, German Catholics got their work ethic from Germany’s Protestant value mainstream,[1] much as the American Catholic work ethic reflects the Anglo-Protestant cultural mainstream, as Samuel Huntington argued in his last book, Who Are We? [2] Both the German and American Catholic value systems diverge sharply from the Ibero-Catholic value system, which still hasn’t made its peace with capitalism.

I’d still be very proud, were I a Scot. Arthur Herman makes a good case that the Scots “invented the modern world,”[3] starting with John Knox’s campaign in the sixteenth century for universal literacy. One could argue that in the 1960s Ireland accepted the Presbyterian/Weberian values, opened economic policy, and, with heavy foreign investment and aid from the European Union, triggered an economic miracle. A part of the Irish formula, as in the case of Quebec’s Silent Revolution of the 1960s, was a significant reduction of the Catholic Church’s influence, above all in education, to the point where one today hears the term “post-Catholic” applied to both Ireland and Quebec.

As The Central Liberal Truth emphasizes, cultural values are far from the only factor influencing economic performance. Even more telling than the Bihar example is the case of North and South Korea, where it is clear that ideology and economic policy trump a common culture with astonishingly discrepant results.

Since James Robinson emphasizes the Confucian examples in his comments, please refer to my comments on his comments below.

It’s certainly true that all religions have currents and countercurrents, including Islam. (I’m a little doubtful about how “relaxed and liberal” the Ottoman Empire really was. The first Turkish printing press didn’t appear until 1729, and Ottoman history in the eighteenth and nineteenth centuries is one of fairly steady decline culminating in the collapse of the Empire in 1918.) But an analysis of 117 countries grouped by predominant religion, presented in Chapter Four of The Central Liberal Truth, makes a quantified case, based on ten indicators, that Protestant countries outperform Catholic countries not only in terms of economic but also political and social development.

Having dedicated the past 25 years to research and writing about the importance of culture, and the twenty preceding years in the field learning first-hand the power of culture, you can imagine how I feel on learning that “the agenda of introducing culture into analysis of growth has not advanced one step from the state of the art of the 1950s.” Now that’s what I call lethal.

I hope that you will read The Centtral Liberal Truth and the companion volumes Developing Culture: Essays on Cultural Change[4] and Developing Cultures: Case Studies[5] Their goal, and indeed my almost half-century-old mission, was to produce the guidelines for progressive cultural change contained in the final chapter of The Centtral Liberal Truth. And who knows? Maybe you’ll find more light than undergrowth.

To Peter Boettke

Alvin Rabushka’s punch line is “…the main causal factor in determining differences in economic performance among nations is the rules of the game that govern the way that people interact with one another (within and beyond national borders) and with nature’s resources.” The implication is that all you have to do is to get the rules of the game right, and the players will play according to them. But as you subsequently explain, there is a cultural reason why those rules are not in place, and therein lies the fallacy of Hernando DeSoto’s Mystery of Capital magic wand. The absence of rules of the game that work reflects a culture that is indisposed to such rules. And if you try to impose them on that culture, the rules will not be respected.

Politics offers a helpful analogy, one highly consistent with the views of Montesquieu and Tocqueville. After the success of the American constitution, a number of newly-independent Latin American countries tried to adopt it. In all cases, it failed, as Tocqueville predicted in Democracy in America.

I was struck by your statement, “Whatever advantages a culture may have, they will not be realized under bad institutions.” Tocqueville said just the opposite: “I am convinced that the luckiest of geographic circumstances and the best of laws cannot maintain a constitution in despite of mores, whereas the latter can turn even the most unfavorable circumstances and the worst laws to advantage.”[6]

To James Robinson

Would that the Nkrumah explanation could be generalized to sub-Saharan Africa as a whole! Then we would have a magic wand that would promise rapid economic development through an indigenous entrepreneurial tsunami: stop preaching socialism and preach capitalism instead! Unfortunately, this has been tried throughout the region without significant results. Africa remains a region largely dominated by tyranny, poverty, ignorance, and corruption. And the cultural analyses of Cameroonian economist Daniel Etounga Manguellé [7] and former World Bank official Robert Calderisi [8] appear a good deal more relevant–and helpful. By the way, Botswana can surely be considered a political miracle/anomaly (largely because of enlightened leadership), but with 75 percent of its foreign exchange earnings coming from diamonds, the case for an economic miracle is a good deal less compelling.

The Chinese were doing well in Indonesia before Suharto. Anti-Chinese riots in which large numbers of Chinese were killed occurred in 1966, driven in part by resentment of Chinese prosperity. But it’s not just Indonesia where Chinese minorities have prospered. Wherever the Chinese have migrated, they have exceeded the wealth-creation of indigenous majorities–in Malaysia, where the Malay majority has enjoyed affirmative action benefits for year, Thailand, the Philippines, Mauritius, Costa Rica, or the United States. The same is true of other “Confucian” immigrants: Korean immigrants in the United States, Japanese immigrants in Peru, Brazil, and the United States.

“Confucianism” (shorthand also for Taoism, ancestor worship, and other influences on Chinese culture) offers 100% predictability with respect to high levels of economic achievement if governments are supportive of economic development. China may have been ahead of the rest of the world in the16th and 17th centuries but fell behind, reflecting in part the Mandarin bureaucrats’ disdain of economic activity, which occupied the lowest rung on the prestige ladder, below even the peasants. But when economic development receives a high priority, starting with Japan n 1868 and including more recently post-Mao China and Vietnam, the results are uniformly eye-opening, mirroring the achievements of the Confucian diasporas.

With respect to your comments about Ireland, Spain, and India, please see my relevant responses to Gregory Clark’s comments.

I passed your comments about Chile to David Homan, a professor of economics at the University of Liverpool and an expert on Chile. His response is being posted separately. It starts, “Of course, Robinson is wrong…” I would only add two comments: (1) the London-based Hospital for Tropic Diseases says, in its guidelines on Chile, “The Chilean Carabineros (the national police) are known for their honesty and refusal to accept bribes.” And (2) Chile stands at number 20 on the 2006 Transparency International Corruption Perceptions Index, tied with the United States and Belgium. For comparison purposes, Brazil and Mexico are tied at number 70, Argentina is number 93, and Venezuela is number 138.

A British person like you can take pride in Argentina’s economic development in the latter decades of the nineteenth and early decades of the twentieth centuries, because it was largely driven by (1) UK investment in Argentine agriculture, livestock, transportation, refrigeration, and port infrastructure, and (2) UK marketing knowhow. Remember that Argentina is among the richest countries in the world in terms of resource endowment per capita–it’s 5/6ths as large as India with about 1/25th of India’s population.

I can understand why you, an economist, reflecting on the endless stream of economists’ triumphs in international development over the past half century, above all in Africa, the Islamic countries, and Latin America, and culminating with Jeffrey Sachs’s magical miracles in Bolivia and Russia, would be complacent about the preeminent role of economics and economists in development. But just in case you ever should have some doubts about that golden record of achievement, how about reflecting on economist Guido Tabellini’s work on the effects of culture on variations in European regional development?

And see if this close-to-home case doesn’t move you: a Harvard person who should know estimates that about 35 percent of the Harvard College student body is either East Asian or Jewish. How can one explain this astonishing fact as other than a cultural phenomenon? And please don’t misinterpret this datum as an economic phenomenon reflecting the prosperity of these minorities (which in itself is a largely cultural phenomenon). In the first half of the twentieth century when Harvard used quotas to limit the number of Jews, a significant number of applicants came from the Dorchester/Mattapan ghetto, Jewish then, African-American and Hispanic now, via Boston Latin School, a public high school.

And if that doesn’t move you, how about Alan Greenspan’s words following the collapse of the Russian economy: “I used to think that capitalism was human nature. But it wasn’t at all. It was culture.”

Notes

[1] Cited in The Central Liberal Truth, p. 91

[2] Samuel Huntington, Who Are We? The Challenges to America’s National Identity (New York: Simon and Schuster, 2004)

[3] Arthur Herman, How the Scots Invented the Modern World (New York: Three River Books, 2002)

The Uniqueness of Chile

[Lead essayist Lawrence Harrison asked Chile expert David E. Hojman of the University of Liverpool to address James Robinson’s comments on Chile. Here they are. – ed.]

—

Robinson is wrong about Chile. Given the time constraints, I will give you a few lines which could possibly be followed, explored, developed, or expanded further.

Possibly Chile has always been “unique,” since the beginning of the Spanish Conquest in the 1540s. For example, the huge physical distance from Madrid, plus geographical isolation from neighbors, plus the fact that Chile was too poor to make it worth investing in improving transport and communication links, made it possible to ignore crown rules much more often than elsewhere in Spanish America. Some examples are the Madrid prohibition for crown officials to marry locally, or the Madrid attempt at keeping the control of land and the control of Indian labor, separate. Also, Jose Toribio Medina in his classic study of the Inquisition in Chile has shown how the Santiago political authorities in the colonial period often felt free to challenge the viceroyal and Church (and Inquisition) orders coming from Lima.

Possibly Chile was also “unique” in that political independence from Spain in 1810-1818 was explicitly sought on the grounds that it would make it possible to free international trade, and international trade was encouraged in order to gain popular support for the independence struggle (see references in my Public Choice 2002 paper). As a result the independence movement succeeded, and, possibly even more important because it would be more permanent, free trade unleashed an unprecedented period of economic growth between about 1820 and 1860. Thus, in a matter of a little more than a generation, the poor, or the poorest, Spanish American colony had become a regional power. Moreover, this had been achieved thanks to introducing and encouraging free trade, which means that Chile was familiar with free trade when Pinochet and his “Chicago Boys” brought it (back) to Chile in 1973. Pinochet did not introduce free trade into Chile. He re-introduced it. In 1973 Chile was a fertile ground for free trade ideas.

Robinson’s approach is simplistic in that he considers only GDP (which expanded without interruption only after 1985) as a sign of a country’s progress. But even this is also a sign of “uniqueness.” All Latin American countries have had military dictatorships lasting for 17 years (as Pinochet’s did) or more, often more than once. But Chile is the only country in the region which as a result ended up with sustained growth and stable democratic institutions. This is at least partly because both these institutions and a successful free trade experience were already there when Pinochet took over in 1973. It is true that rural labourers had been exploited for generations. But it is also true that Chile was considered a civilized and free country, and the country of choice, by political refugees from Argentina, Bolivia, Brazil, Ecuador, Peru and Venezuela, among other countries in the region, between 1818 and 1973.

Of course Chile was, and is, a country full of contradictions. For example, Arturo Olavarria Bravo, who is quoted by Robinson (via Loveman) was a prominent member of local Nazi parties both before and after his serving as minister to the Popular Front (as in France’s and Spain’s Popular Fronts of the same period) government of Pedro Aguirre Cerda. So there is a question as to how seriously we want to take what Olavarria is saying. But then Chilean Nazis were also different from German Nazis. For example, Chilean Nazis were more ‘left-wing’, more pro-Chilean (as opposed to pro-German), and more pro-German-Nazis, than the German-Chilean descendants of German colonists in Chile during the period.

Some Thoughts on Harrison and Hojman

In response to Lawrence Harrison, I agree that there are huge development problems in Africa, but I don’t see the evidence connecting this to culture. Botswana has been a great success, and it is true that a large proportion of GDP (about 40%) is diamonds, but diamonds are usually connected to political instability and poverty in Africa, think of Sierra Leone or Angola. Even without diamonds Botswana would be much richer than other African countries. Yes, there has been good leadership, but Botswana had good leadership in the 19th century [1] so this is not a coincidence, nor can it be tied in a simple way to culture. What distinguished the Tswana states, from which modern Botswana sprang, was not their culture but rather their political institutions and this is the root of a succession of leaders who internalized public welfare.

As I said, it might be true that if one had the right institutions and policies in place, Africa would not grow, but I don’t see any evidence supporting this, and Botswana is certainly against it.

I find the attempt to provide a cultural explanation of the economic success of Chile since 1985 utterly unconvincing. The fact that Chile had free trade in the 19th century is unremarkable—so did every other Latin American country. Most Liberal governments massively cut tariffs and removed obstacles to trade, and the first growth in these countries was based on trade—coffee in Colombia or Costa Rica, guano in Peru, wool, mutton and beef in Argentina. The notion that Chile was somehow a “civilized and free country” compared to other Latin American countries in untenable. First, it is difficult for me to connect civilization, even if I am not sure what its relationship is with culture, with the murderous Pinochet dictatorship who bequeathed a structure of political institutions designed to bolster the right. Second, Chile was not free. Illiterates were only given the vote in Chile by Salvador Allende in the early 1970s, whereas they were enfranchised much earlier in most Latin American countries—in 1936 in Colombia, for example, and in the 19th century in Argentina. Moreover, there was huge coercion in elections in rural areas, as I noted. It was only after this was stopped in 1958 that campesinos were free to vote for who they wanted, which drove Allende into power. The Chilean economic miracle has little to do with culture but is rather the joint outcome of the massive deconstruction of the traditional rural economy achieved by the land reforms in conjunction with the change in the incentive environment that flowed from some of Pinochet’s reforms. These changes allowed a dynamic rural sector to emerge for the first time.

I would certainly be the last person to argue that economists such as Jeffery Sachs have been startlingly successful in promoting development. But why would you expect them to be? It is foolish to imagine that economists can come up with a magic bullet to solve the problem of development. Underdevelopment is not a coincidence and arises because societies become trapped in dysfunctional political equilibria where the incentives to invest and innovate, and do all the things that makes a society prosperous, are absent. Such a situation is difficult to change because it is not just about economics (getting the prices right, etc.) but also about politics, which we understand much less well. While I have tremendous respect for the work of Guido Tabellini, his work only establishes to my mind that some variables capturing aspects of what we might call culture are correlated with income per-capita. As with the facts about the success of minority groups much beloved by cultural theorists, I find these correlations interesting, but I am not convinced that they demonstrate the causal role of culture. Many things are positively correlated—for example, latitude and income per-capita—but this does not mean they cause one another.

This exchange does, however, demonstrate a different failure of economists: they have so far not focused intensively enough on articulating and testing theories of how culture influences development. Here Tabellini’s work is seminal. We probably all agree that we need much more of this.

Notes

[1] Q. Neil parsons, King Khama, Emperor Joe and the Great White Queen, (Chicago: University of Chicago Press, 1998).

Reply to Robinson on Botswana

[Lawrence Harrison asked Stephen Lewis, the editor of Botswana ex-president Quett Masire’s forthcoming autobiography, Memoirs of an African Democrat, to comment on the discussion of Botswana in James Robinson’s reply to Harrison’s lead essay. Lewis’ case study on Botswana is featured in Harrison’s book The Central Liberal Truth. – eds.]

Having spent a substantial part of the past thirty years working in and for Botswana and writing about its development, I read the differences between Larry Harrison and James Robinson as narrower than the latter’s criticism of the former would suggest. Clearly, as Robinson says, there was good and strong leadership in Botswana in the 19th and early 20th centuries, before the Protectorate was declared and before independence. And, there were well-developed local institutions, centering around the role of the chief and the chief’s kgotla (gathering place for consultations, as well as for criminal and civil procedure under Customary Law) in governance at the local level. The leaders who came forward before independence, led by Seretse Khama and Quett Masire, faced the problems of creating national institutions of governance to replace British indirect rule through chiefs, to promote national rather than tribal loyalties, to transfer mineral rights from individual tribes to the national government, and to establish democratic rather than autocratic institutions at the local level (e.g., to remove the right of the chief to allocate tribal land or stray cattle). The process started in 1961 with a newly elected African Council and a Legislative Council that included equal numbers of blacks and whites (plus one Asian), and it continued well past independence in 1966.

It may be a matter of semantics, but it seems to me that it is pretty difficult to separate two things: the attitudes and practices that I suspect Harrison would attribute to “culture,” and the formal institutions Robinson associates with “the Tswana states.” Those institutions were fundamentally transformed by the leadership of the new nation. The skill with which they incorporated the traditional (cultural?) approach of consultation before decisions were reached by chiefs into the modern forms of democratic institutions at both national and local levels was, I think, remarkable. That the colonial leadership in the Protectorate, in the person of Peter Fawcus, incorporated that same consultative approach in making the reforms was a major contributing factor to the success of that transformation.

A former colleague in Botswana was once ruminating on the Protectorate era, and he remarked, with some anger, “The British left us with nothing!” Then he paused and considered the lack of the colonial heritage that plagued other African countries and smiled, “On the other hand, the British left us with nothing.” Traditional institutions, and I would say, traditional culture, was almost completely undisturbed by the Protectorate authorities. A whole host of characteristics that are valued by Tswana society carried over into the way in which the new institutions of government in fact operated.

Robinson suggests that if the right institutions and policies were in place the rest of Africa could grow as Botswana has grown. Having worked in other African governments as well as in Botswana’s, I would observe that the processes by which the “right” policies are developed are critical. Those processes depend not just on the formal institutions, but also on the way in which they are operated by political leaders and civil servants. Expectations of honesty, modesty, accountability and open debate, for example, are examples of what I would think of as “cultural” characteristics that I found when I first began working in Botswana—and that I found were absent in a number of other African (and Asian) countries that have not “worked.”

More on Chile’s Head Start

First, the nineteenth century was very long. A hundred years. Robinson and I are talking about complete different historical periods. The free trade I mentioned, in which Chile was engaged, happened very early on, with public support for it being made explicit even before 1800. Chilean intellectuals such as Manuel de Salas, Armando de la Cruz, and even the Libertador Bernardo O’Higgins himself were arguing in favor of free trade, on economic and political grounds, in some cases twenty years or more before David Ricardo’s writings and the Corn Laws controversy in England. Thus, Chile had an advantage of at least 50 years, possibly more, in relation to the free trade other countries in the region engaged in as the British Empire expanded. By the time other Latin American countries were starting to export primary commodities to England and elsewhere, Chile had–at least partly thanks to the progress brought by several decades of free trade–already developed institutions, including a national army and a strong sense of national identity across different social classes, which allowed it to free Peru from Spanish rule, and then to go on to win all the local wars it was involved in. In other words, by the time other Latin American countries were starting to benefit from free trade under Pax Britannica, Chile had already done it for several generations, having started even before England herself had embraced free trade.

As to being “civilized” and “free,” again Robinson and I are talking about different things. In the nineteenth century, Chile was “civilized” and “free” as compared with the rest of Latin America (it does not make much sense to compare Chile in the 19th century with Scandinavian countries in the 21st century). The fact is that, again from very early on in the nineteenth century, Chile was chosen as their favourite country to go into exile by the most distinguished Latin American democratic intellectuals, including, for example, Argentinian Domingo Faustino Sarmiento and Venezuelan Andres Bello. Before going to study in the United States and Europe became fashionable, the children of the Latin American elites typically chose to become students of Chilean universities. Of course, these exiles and students were not illiterate campesinos. No one is claiming that. The benefits of progress only very gradually were extended from the top to the bottom of the social pyramid. Chile, in that sense, was no different from the rest of Latin America, and from many other countries.

A Plague on Both Your Houses

In my original response I criticized Lawrence Harrison’s advocacy of the key role of culture in growth on the grounds that “in 50 years the agenda of introducing culture into analysis of growth has not advanced one step from the state of the art of the 1950s.” I now feel that I owe equal criticism to Peter Boettke and James Robinson, who both contend that incentives, and incentives alone, will explain all economic outcomes. This of course is the famous founding position of modern economics in Adam Smith, 1776, as exemplified by the quote Boettke gives:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

That doctrine was enunciated 230 years ago. If this is such a foundational truth of economics, why are we still debating whether it holds? The sad answer is that this is so because there has been pitifully little proof of the key role of incentives in economic growth in the subsequent 230 years.

There is, for example, little difference in output per worker in modern Germany and the USA. They are both very affluent modern societies. Yet the OECD reports that the marginal tax rate, taking all burdens into account, on the median wage earner in Germany in 2000 was 65%, compared to 34% in the USA. If incentives are the key to growth, why can the modern European welfare state, whose grabbing hand claims the majority of the output of its citizens, and returns it in social entitlements, continue to function? Adam Smith himself would have denounced the political economy of the modern welfare state as foolish, wasteful, unsustainable, and a sure recipe for the impoverishment of all its inhabitants.

Further, I would bet Peter and Jim that there are plenty of modern African nations subsisting at some of the lowest living standards humanity has ever witnessed, where the marginal effective tax rate on the average earner is well below even the current U.S. rate. In modern Germany the state provides health care, education, subsidized transport, TV channels, the lot. In these impoverished African states if you want decent health care, decent education, travel, information, then you buy it with your hard earned money. Yet these states remain mired in poverty.

Similarly, modern economic growth did not emerge till around 1800 in countries like England. We can go back to the years 1200-1800 where there was very little growth in pre-industrial England. What we find, astonishingly, is governments that were so constrained by English principles of Parliamentary control over taxes, that the average total tax take of all government in England before the Glorious Revolution of 1688-9 was in the order of 1-3% of incomes. England in 1300 was a capitalists’ paradise, with a 1% tax rate on incomes, stable property rights, and strong protections for private property. Yet England then had little or no growth. Something beyond incentives seems to be missing.

The British Empire in the nineteenth century was constructed on the principles of laissez faire. The colonial civil servants of India were, for example, all schooled explicitly in the principles of limited taxation, stable property rights, clear dispute procedures, and limited government. India was not just a nation, but a whole continent, which under the British was open to complete freedom of import of entrepreneurial talent, capital, technology, and goods. Yet India saw almost no economic growth before Independence in 1947, while Canada, Australia and New Zealand flourished under the same formula.

Incentives are clearly not sufficient for economic growth. It turns out, more amazingly, that the modern welfare state suggests that they are not even necessary.

If you want to stay within the incentives framework, clearly there must be other social incentives that are much more powerful than the formal incentives provided by the explicit institutional structure. But those incentives remain largely unmeasurable, and begin to look very much like the invocation of culture that Peter Boettke and James Robinson want to avoid.

The Basques and Chile

One factor in Chile’s exceptionalism that has not yet been mentioned is the profound Basque influence starting in the eighteen century. Arnold J. Bauer in Chilean Rural Society (Cambridge University Press, 1975) writes:

Between 1701 and 1810, some 24,000 immigrants arrived in Chile from Spain [about doubling the number of Spaniards] and forty-five percent of these came from Navarre [a province just east of the Basque Country whose people share many Basque traditions] and the Basque provinces. Everyone agrees on the extraordinary impact these … groups had, including [the renowned Basque writer] Miguel de Unamuno who called Chile along with the Jesuit order the two great creations of the Basque people. Their road to economic success and social prominence ran from commerce to the countryside to office…Luis Thayer Ojeda, one of the most accomplished of many Chilean genealogists, thought that ‘three-fourths of the distinguished personages of nineteenth- century Chile were of Basque descent. [1]

The Basques have a rich tradition of entrepreneurship and cooperation that has expressed itself in a variety of settings, including Boise, Idaho. They were the most successful farmers and administrators in what would become Venezuela, according to the book Viaje a la Parte Oriental de la Tierra Firme en la América Meridional by French writer François Depons, published in 1806.

Final Comments

Your repetition of the assertion “in 50 years the agenda of introducing culture into analysis of growth has not advanced one step from the state of the art of the 1950s” suggests that you may not be aware of the following books, which I commend to you:

David Hackett Fischer, Albion’s Seed (1989)

Francis Fukuyama, Trust (1995)

Mariano Grondona, Las Condiciones Culturales del Desarrollo Económico

(1999)

Samuel Huntington, The Clash of Civilizations and the Remaking of World

Michael Novak, The Spirit of Democratic Capitalism (1982) — The Catholic Ethic and the Spirit of Capitalism (1993)

David Landes, The Wealth and Poverty of Nations (1998)

Robert Putnam, Making Democracy Work (1993)

Lucian Pye, Asian Power and Politics (1985)

Carlos Rangel, The Latin Americans (1976)

And, with all due modesty,

Lawrence Harrison, Underdevelopment is a State of Mind (1985)

– Who Prospers? (1992)

– The Pan-American Dream (1997)

— Culture Matters (co-edited with Samuel Huntington) (2000)

— Developing Cultures: Essays on Cultural Change (co-edited

with Jerome Kagan, 2006)

— Developing Cultures: Case Studies (co-edited with Peter

Berger, 2006)

— The Central Liberal Truth (2006)

For James Robinson

I hope that the absence of further comment on the Chinese diaspora and “Confucianism,” East Asian and Jewish students at Harvard, Chile, and Botswana, indicates that you are at least a little less doubtful that culture matters. Let me add one more argument. If economic development were only a question of getting “the right institutions and policies in place,” then why has it proven so daunting to do that for the large majority of poor countries? The world’s best economists have studied, analyzed, modeled, and prescribed for a half-century, with meager results. Those of us who believe that culture matters, particularly those of us who have lived and worked in the field for many years, focus on institutional debilities as a manifestation of a culture adverse to development. And so does Douglass North:

In all societies…people impose [formal and informal] constraints upon themselves to give a structure to their relations with others…That the informal constraints are important in themselves (and not simply as appendage to formal rules) can be observed from the evidence that the same formal rules and/or constitutions imposed on different societies produce different outcomes…Where do informal constraints come from? They come from socially transmitted information and are a part of the heritage that we call culture. [1] (my emphasis)

Final Reflections

Lawrence Harrison doesn’t have a hypothesis about culture and economic development. He has a hypothesis about the interaction between culture and institutions. Though he is not clear about this, this is what his argument implies, and this is the only thing that could explain why Chinese people have a good culture, yet China is extremely poor, and why the supposedly beneficial Chilean culture only became apparent in terms of economic performance after 1985.

This might be right, though I doubt it. How could one know if it were right? Not by quoting various authorities. The way we try to discover if a hypothesis is right in social science is to test it. To do so we’d need to be much more specific about how to conceptualize and measure culture. In my first reply I tried to raise this issue but the proponents of the cultural hypotheses seem to be remarkably uninterested in measurement and testing. They seem content with vague concepts, and untested arguments. I think this is why Greg Clark maintains that there has been so little progress on this topic and I agree with him. In the long list of books Lawrence Harrison mentioned I think that the one by my colleague Robert Putnam is the only one with a serious empirical analysis. Yet, though I like this book immensely, there are huge problems in using the data to identify a causal effect of culture on democracy and economy. Indeed, it was these problems that Guido Tabellini tried to address in his important paper, though my feeling is that he did not do so in a satisfactory way. I should add however that the sense in which Putnam talked about culture, or “social capital” is far from the emphasis on values and beliefs which Lawrence Harrison started out using as definitions of culture.

This lack of conceptual clarity is manifest in Stephen Lewis’ discussion of Botswana. I enjoyed these comments a lot, and I personally have learned a lot from Stephen Lewis’ work–he wrote a seminal study of economic policy in Botswana–and from him in person. He pointed out that at one level there was not much of a difference between the cultural and institutional interpretations of Botswanan success, but I think this reflects the fact that “culture” is used in very vague ways. I think I can describe what was important about the political institutions of the Tswana states and how this influenced the ways political elites behaved, though I admit there are many things I do not understand. This may be isomorphic to a claim about Tswana culture, but I find the latter much harder to measure or conceptualize.

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